Gas and Economics

Some people (okay a LOT of people) have been complaining about the price of a gallon of gas. First off … the price of gas in the US is one of the lowest in the world, Europeans generally pay anywhere from $5-$10 a gallon to fill up … most of which is taxes. Second off gas prices are, in large part, dictated by the price of crude oil … this in turn is mainly controlled by OPEC as they represent the collaboration of most of the Oil Producing countries in the world.

For various reasons the price of crude oil has been rising over the last several years … this means that the refineries that we depend on for gas have to pay more for their oil … in turn having to charge more for the gas they produce meaning that the stations have to charge more to cover the expense of buying gas.

Now there are a lot of factors involved here … but part of the problem also comes in the fact that no new refineries have been built in the US in roughly 30 years. The existing refineries have been operating at max capacity for several years now … we can’t produce gas any faster even if we got more oil. Add to that the fact that there are MORE vehicles using the gas … many of which are of the low MPG rated ‘utility vehicles’ and you have a situation of increasing demand with a fixed supply whose raw materials are becoming increasingly expensive.

Now … let’s take a look at the consumer end of things since that’s where most people are complaining about things. We’ll create a fictitious gas station called the Gas-O Line …

I’m opening a new Gas-O station … and I buy 1 weeks worth of gas to get started at $1.00 a gallon (keeping the numbers simple for the purposes of calculation) … of course I have other expenses, station maintenance, electric bill, phone bill, employee salaries (and payroll taxes), rent or mortgage, insurance, etc. … I determine that I need to add $0.50 to each gallon of gas to cover these expenses and, as a business, I want to make a profit so I decide on a 10% profit margin … that would be another $0.15 so I need to charge $1.65 a gallon to cover my expenses + profit … of course the government lays another tax on the sale of that gas that I have to collect at the time of the sale … let’s say it is 10% as well (that’s another $0.165) … so now I’m charging $1.815 / gallon when I open my station.

2 days after I open something happens and my supplier raises his price to 2.00 a gallon. No problem, right? I’ve got a weeks worth of gas already right? Wrong. If I continue to sell my gas at $1.815 a gallon for the rest of the week I won’t have enough money to buy the next weeks supply when the time comes. (Remember only $1.15 of that $1.815 will be around the $0.50 is already spent on employees, etc, and the $0.165 is straight to the government.) To insure that I make enough money to keep my supply going I have to raise my prices to a minimum of $2.75 a gallon … with no profit (which if I’m not going to make any profit I may as well just close down.) … so let’s say $2.85 (less than a 5% margin) … but I’ve already sold 2 days worth so I also have to make up the difference in that gas (this would depend on numbers that we haven’t been dealing with how much sold in those two days, how much was left in the tank, etc. so for now we’ll assume that it is another $0.05 to cover it) … so $2.90 a gallon then.

Most people would accuse me of being ‘greedy’ because of this … say that ‘I’m taking advantage of things’ ... now certainly I can gamble that the price will come back down by the time I need to buy my next weeks worth of gas … but if I do that and keep my price at the $1.815 and the price doesn’t come down I will only be able to afford to fill half my tank ... and if supply prices continue to rise that gets ugly fast.

There are of course a lot of things I’m not taking into account in all this to try and keep it simple. But that is the gist of it … the electric company works in much the same way … they have to charge based not on what they paid, but on what it will cost them to keep their supply coming.

“But prices should be kept low … we need gas!”

In other words “Government should use our tax money to subsidize gas so I can afford to drive whenever I want.”

No, no, no and NO.

We need LESS government in the economy, not more. Part of the problem in general is that we don’t ‘need’ gas … driving is a luxury, a convenience, not a necessity. That we, as a society, have grown so dependent on it is a completely separate matter.

Another part of the problem is those organizations that call themselves ‘environmentalists’ … It has been environmental laws (and a bit of a NIMBY (Not in MY backyard) mentality in general) that has prevented the construction of new refineries to help keep up with the increasing demand for fuel. It is environmentalists that have so far prevented oil drilling in the section of ANWAR that was set aside for oil drilling as well as off the coast of Florida increasing our dependence on foreign oil from a very volatile international oil market – though we have to keep in mind that without more refineries to refine the crude oil, gathering more oil may have a minimal impact on the price of gas due to the fact that our refineries are already operating at max capacity, the only difference would be that we wouldn’t be buying the oil from overseas so the refinery would likely be getting it’s raw material cheaper.

Oh … and also as far as ‘need’ keeping the price of something low …. Think of it like this:

You are the only person in 1000 miles that can do ‘job A’ … 60% of the people in that 1000 miles ‘need’ job A done. Should you be forced to work for minimum wage because it is a ‘needed’ job? You’d better get some other people to learn to do the job … but what’s their incentive if they can only work for minimum wage? [Ignoring for a moment the fact that I don’t generally agree in minimum wage laws in the first place ….]

Most of you that know me and read this already know all this of course and understand that one of our greatest bastions of freedom is the Free Market system, and that the Free Market system fails to operate when the government interferes with it.